China's Real Estate Bubble: A Losing Bet
China, one of the world's largest economic superpowers, has taken an extremely risky gamble. Costing hundreds of billion dollars each, dozens of cities are being counstructed entirely from scratch, at an alarming rate. These cities are being built on a massive scale, but the majority of them have yet to be populated, causing them to be known as China’s “ghost cities.”
The largest of these cities is known as the Kangbashi New Area of Ordos. Even though the city was designed for over a million people, “only 2% of its buildings were ever filled” (Bohemian Blog, Welcome to Ordos). Because of the fact that no one is moving into these cities, the companies that are constructing the cities need to find a way to pay for all of the buildings that they have made, or else the companies would have gone bankrupt long before they started working on a second city. The construction companies have decided that the best way to sell these houses is to market them towards the rapidly growing middle class of China as an investment. China’s middle class has experienced a boom in the past decade, resulting in many people who have lots of spending money, and not a lot to spend it on. As a result of this, people have turned to the ghost cities as a way to invest their money. This is where the real danger resides for the people, because while real estate values have increased recently, if every home is sold off as real estate and no one actually moves in, the properties will most likely decrease in value as the city slowly starves.
China’s economy has had many major changes over the past few years, and while the number of Chinese people who qualify as ‘middle class’ have gone up, the growth has been followed by an uncertainty of how to spend their money (McKinsey & Co, Mapping China’s Middle Class).
People have invested in what looks to be a promising way to make money while supporting the growth of the country, but fail to see the imminent danger if the ‘real estate bubble’ collapses. As is becomes apparent that people do not want to actually move in, home values will drop until they are cheap enough to convince the poor to move in, causing those who invested in the real estate to sell their properties for a loss. In fact, this is already beginning to happen (Business Insider, China’s Most Famous Ghost City).
As you can see in the graph above, property value in 2007 was growing at a rapid rate. The growing middle class saw this, and bought as much property in the ghost cities as they could. Once people began to realize that the cities weren’t being populated, prices dropped, and those big investments didn’t pay off.
One reason for people not wanting to move into cities like the Kangbashi New Area is because there aren’t many large companies providing jobs in those cities. While the cities are practically complete with fully functioning libraries, museums, and residential areas, there aren’t any big businesses that are hiring people in the ghost cities. Big companies like Apple and Starbucks wouldn’t move into these cities unless they saw that there were plenty of people to sell their products to, but since there aren’t any people to sell to, there is no reason for the companies to move in. This catch-22 is attributed to being one of the main causes of the decrease of property value in China over the last few years. If a major change to China’s spending strategy does not happen soon, it seems more than likely that these cities will lose much of their value, and cause a major loss in China’s economy as a whole.
Some people might say that these cities aren’t doomed to failure. Some believe that due to the dropping housing prices, living in these cities is now available to lower class citizens, who aren’t concerned with getting a high paying job at a large company. According to The Guardian, some farmers and their families are moving into Kangbashi to fill the gap (The Guardian, ‘Re-education’ Campaigns to China’s New Ghost City Dwellers). Now that the city has a few people, the city may begin to recover.
While there does appear to be hope for Kangbashi, not all ghost cities may fare as well. Farmers might not move into every ghost city, and even if they do, they don’t have the same purchasing power as the middle class does, and may not attract big businesses. While the farmers might not care about big businesses, a city needs a balance of lower, middle, and upper class to function properly. Otherwise, the city’s internal economy will be extremely one sided and unbalanced. A restaurant cannot function with only dishwashers.
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